The True Price of Reduced Competition in Health Care: Hospital Monopolies Drastically Drive Up Prices

New study reveals the potential damage of the merger frenzy that has accelerated in recent years.

 

hospital monopolies
Zack Cooper

Since the Affordable Care Act was signed into law, the American health care industry has experienced a frenzy of mergers and acquisitions. Regulators are currently reviewing two proposed mergers that, if approved, would reduce the number of top national health insurers from five to just three gigantic companies. Among hospitals, this trend is even more pronounced and could lead to significant price hikes.

 

According to a recent analysis by Kaufman, Hall & Associates, an Illinois-based consulting company that tracks hospital M&A deals, 2015 has been a record year for hospital consolidation: the number of hospital mergers and acquisitions grew by 18 percent to a total of 112 last year, compared with 95 hospital mergers in 2014.

 

In New Jersey alone, the past year has been marked by several high-profile hospital mergers. State regulators are expected to approve a merger between Barnabas Health and Robert Wood Johnson University Health that will create the state’s largest hospital chain. Recently, they approved a merger between Meridian Health and Raritan Bay Medical Center that will create a joint entity serving 1.5 million patients.

 

Meridian is also waiting on regulatory approval for another deal: its proposed merger with Hackensack University Medical Center. This is not unusual, as a number of hospital-management companies across the country are currently involved in multiple M&A deals.

 

Hospital consolidation has been part of the U.S. health care system since at least the early 1980s, when hospital mergers were so common they occurred at a rate of nearly 200 per year. However, since the Affordable Care Act went into effect, there has been a rapid increase in the number of hospital M&A deals. Since 2010, when there were 66 hospital mergers, the rate of hospital consolidation has increased by 70 percent.

 

The result of this wave has been a dramatic increase in concentration in the hospital market, with hospitals swallowing independent providers along with their personnel and becoming powerful regional monopolies. Hospital administrators who push for mergers claim it will help hospitals reduce costs, be more efficient, and provide better, cheaper care for patients. Economists, on the other hand, are concerned that the increasing consolidation of hospitals will allow them to leverage their market share in order to inflate medical bills, thus driving up consumers’ health care costs.

 

A new study, conducted by Zack Cooper of Yale University, Stuart Craig of the University of Pennsylvania, Martin Gaynor of Carnegie Mellon, and John Van Reenen of the London School of Economics, confirms these concerns and sheds light on the real cost of reduced competition among hospitals: markets where hospitals have a monopoly are exposed to massive price hikes. Hospital prices in monopoly markets are 15.3 percent higher than in markets with four or more hospitals. Hospitals in duopoly markets charge prices that are 6.4 percent higher, and treatment in markets that have a hospital triopoly is 4.8 percent more expensive.

 

In other words, increased concentration in health care ultimately victimizes consumers, as mergers allow hospitals to leverage their market position and drive up prices.

 

In order to gauge real health care spending and track regional variations in hospital pricing, the authors had to go beyond the data most commonly used by regulators as a basis for federal policy—Medicare data—and focus on prices negotiated between hospitals and private insurers. The details of these deals are notoriously guarded. For this reason, most of the policymaking analysis regarding U.S. health care relies on data from Medicare. Medicare, however, covers only 16 percent of the population and accounts for 20 percent of total health care spending, while 60 percent of Americans have private health insurance. “As a result,” the authors write, “there is a great deal that is unknown about how and why health care providers’ prices vary across the nation and the extent to which providers’ negotiated prices influence overall health spending for the privately insured.”

 

By analyzing newly-released data from Aetna, Humana, and UnitedHealth on insurance claims from 2007-2011 that covered 28 percent of individuals with private employer-sponsored health insurance in the U.S., the authors were able to find enormous variations both between different geographic regions and within those regions.

 

“One of the things we found is that not-for-profit hospitals don’t price any less aggressively than for-profits. We subsidize not-for-profits to the tune of $30 billion annually, in the form of tax exemptions, and we have to ask what that money is getting us,” says Cooper, co-author of the study.

 

One factor that was a major contributor to price hikes, even after controlling for factors like high labor costs, location in a lower-income area, and for-profit motives, was market structure.

Case in point: Grand Junction, Colorado.

 

In 2009, as he was appealing to the American people to support the Affordable Care Act, President Obama traveled to Grand Junction for a town hall meeting held in one of the city’s local high schools. Back then, Grand Junction was considered the envy of many American towns, a poster child for affordable, quality health care: per-capita Medicare spending in the city was much lower than the national average, yet most residents still had access to quality care.

 

Obama used his speech in Grand Junction to tout the city of 50,000 as a model for the entire nation. He wasn’t the only one singing Grand Junction’s praises: at the time, the city’s unique model, which focused on provider-insurer partnerships to reduce Medicare costs, was lauded by policy makers and media outlets as a paragon of health sector efficiency. Grand Junction was widely seen as a place where (to quote Tom Brokaw) “health care works”.

 

But as it turns out, Grand Junction was not the cheapest health care market in the country—in fact, it was one of the most expensive. While local Medicare costs were indeed low—Grand Junction had the third-lowest Medicare spending per beneficiary in 2011—the city also had the ninth-highest inpatient prices. In 2011, Grand Junction had the forty-third highest private insurance spending per capita in the country.

 

The reason for that had a lot to with the regional market structure: the residents of Grand Junction and the surrounding region of Western Colorado are served by a single hospital. The lack of local competition helped drive Medicare costs down, but it also drove private prices way up.

 

 

Increases in hospital market concentration lead to price increases

 

There are increasing signs that federal regulators are beginning to worry about the recent wave of hospital mergers. The FTC has recently moved to block three hospital mergers in Illinois, West Virginia, and Pennsylvania, and it has repeatedly sounded alarm bells regarding uncompetitive hospital mergers in recent years. In February 2013, the Supreme Court reaffirmed the FTC’s authority to block hospital mergers, by asserting its authority to block the merger of two hospitals in Georgia.

 

Jon Leibowitz, the former chairman of the FTC, echoed the regulatory agency’s growing concerns when he told the Wall Street Journal in 2012, “If you want to do something about controlling costs in health care, you have to challenge anticompetitive hospital mergers.”

 

The history of health care antitrust is rife with failures when it comes to hospital mergers. Until the 1980s, hospitals were largely exempt from antitrust lawsuits, thanks to various federal and state statutes. As a result of this, and due to changes in the way federal agencies reimbursed hospitals for Medicare costs, hospitals looking to reduce costs turned to consolidation, hoping it would help them counter the bargaining power of private insurers. Only after hospital mergers became common did regulatory changes lead to the application of antitrust laws to hospital acquisitions as well.

 

The hospital “merger mania” of the 1980s and 1990s inspired widespread resistance. According to a 2002 study by Peter J. Hammer and William M. Sage, between 1985 and 1999 there were 394 medical antitrust disputes debated by U.S. courts: hospitals were defendants in 61 percent of these. Hammer and Sage, however, note that only six percent of these antitrust cases were generated by public enforcement agencies. The rest were brought forth by private parties: physicians, pharmaceutical companies, nurses, and other hospitals.

 

The record of antitrust authorities taking on the hospital industry is mixed, at best. As Hammer and Sage note, “attempts to prevent hospital mergers are simultaneously the most visible and the least successful aspect of public antitrust enforcement.” In 1989, the Department of Justice tried and failed to block a merger between two of the three major hospitals in Virginia’s Roanoke Valley. Between 1994 and 2000, the FTC and the Justice Department made seven failed attempts to block hospital mergers due to judicial resistance.

 

In the early 2000s, the FTC began to study past hospital mergers and learned that these often led to significant price increases. As a result, the commission became much more aggressive in blocking hospital mergers, and also far more successful. However, despite the growing aggressiveness of regulators, the vast majority of hospital mergers do receive regulatory approval, and “mega-mergers” between huge hospital chains have rarely raised red flags in the past.

 

In a 2011 paper, Duke University’s Clark C. Havighurst and Barak D. Richman argue that the way health care is “designed and administered in the United States” expands the pricing freedoms of monopolists, “making monopoly’s wealth-redistributing and misallocative effects substantially more serious than monopoly’s effects usually are.”

 

The Affordable Care Act further complicated the ability of regulators to pursue antitrust cases against hospital mergers, as it deliberately encouraged hospital consolidation by creating incentives for physicians and health providers to coordinate and work together under accountable care organizations (ACOs). What followed was rapid growth in concentration in the hospital market.

 

As Havighurst and Richman note, the Affordable Care Act “does little to address the monopoly problem.” The political debates preceding its passage largely split along party lines. “Democrats, who might normally be expected to object to monopoly’s redistributive consequences, mostly avoided the issue because they feared losing industry support for their symbolically important reform project. Republicans, though decrying the proposed bill’s potential costs to consumers and taxpayers, were unspecific about its potential for overpaying providers, a political constituency that they, like the Democrats, were reluctant to offend.”

 

The result: millions of people have been forced to carry “exactly the kind of health coverage that currently serves provider and supplier monopolists so well.”

 

Cooper doesn’t believe the ACA is really at fault for hospital consolidations but rather the power struggle between providers and insurers. “I don’t think the ACA is what’s making these mergers happen. I think the leading reason is that it gets hospitals tremendous bargaining leverage against insurance companies. At this stage it’s not a power struggle, it’s a bludgeoning. You’ve got hospitals that have a tremendous amount of market power.”

 

Historical evidence suggest there’s a strong connection between hospital market concentration and massive price increases. Already in 1989, Jonathan B. Baker warned of the dangers of collusion in the hospital market: “a reduction in the number of hospitals in a market may allow the remaining hospitals to cooperate in a price increase for all or most services.” In the 1990s, the newly consolidated Partners HealthCare made a deal with Blue Cross Blue Shield that famously caused a health care cost crisis. According to a 2012 study by the Robert Wood Johnson Foundation, “the magnitude of price increases when hospitals merge in concentrated markets is typically quite large, most exceeding 20 percent.”

 

The significant consolidation of hospitals has turned hospitals from independent health providers to industrial behemoths that control vast market shares. Their market share has not only allowed them to leverage their power in negotiations with private insurers but has also translated to political power. Hospitals now account for much of health care lobbying expenses: the American Hospital Association, the leading industry trade group, has spent $15 million on lobbying in 2015 (a drop from $20 million in 2014).

 

According to the website OpenSecrets.org, hospitals and nursing homes spent more than ever on lobbying at the height of negotiations over the Affordable Care Act, spending $107 million in 2009 and $106 million in 2010 in an effort to shape the legislation.

 

“What’s been so interesting for me is to see how aggressive the American Hospital Association has been in coming after me,” says Cooper, who claims the American Hospital Association has funded a couple of critical reports about his paper.

 

While undoing already approved mergers and breaking up big health care providers seems unlikely, regulators can still do plenty to combat the uncompetitive effects of hospital consolidation. Havighurst and Richman, for instance, suggest a “vigorous, rather than tentative or circumspect, enforcement of the antitrust laws.”

 

Cooper suggests rigorous antitrust legislation and increasing competition among hospitals as a possible solution. “We need to recognize you can’t have hospitals merge and allow them to set their own prices. We need very aggressive antitrust enforcement and a recognition that these prices really matter. There are very, very different questions about what to do in markets that are already consolidated, like northern California or New Haven, Connecticut. We have to think long and hard about regulating prices in certain markets. One of the things we really need is nuance when talking about health care. We get into all sort of trouble when we treat ‘health care’ as a single entity. For instance, I can clearly choose elective care, but in the case of emergency care I might not be able to choose.”

 

Another solution, he says, might be exposing hospitals to some financial risks. “Say I do a hip replacement, and it doesn’t go well. Two weeks later I have to come back to the hospital to have it done again. In our current world, the hospital gets paid twice. It offers bad care but gets double the reimbursement it would have gotten if it did it well and I didn’t need to come again. We need to be able to say to hospitals, ‘If something goes bad, it’s on you.’”

 

Big hospitals are not bad per se, he stresses. “There are elements of scale that are important in the hospital sector. If I have cancer, I want to go to a place that does a lot. Scale is not a bad thing. The bad thing is two bad hospitals buying each other and offering worse care at a higher price in a bigger organization.”

 

The case for hospital consolidation, though, has been limited so far. “I have never seen the evidence that consolidation improves quality in the health care space. I have never seen a study that comes out and says that consolidation makes things better,” says Cooper. “I’ve seen a fair bit evidence that consolidation raises prices.”

 

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

6 comments

  1. Pingback: More Cowbell «
  2. Is government intervention in mergers really the best solution to consolidation? It seems to me that removing barriers to entry would, over the long run, accomplish far more to reduce medical costs. Perhaps my economics knowledge is too simple, but I was taught that high profits would normally attract new entrants.

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